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TDF Trends: Falling Fees, Blossoming Asset Diversity

BrightScope, an independent financial information company, and Target Date Analytics, which provides analysis, theory and benchmarking of target-date funds, recently released their newest study in their “Popping the Hood” series, providing a detailed analysis of target-date funds (TDFs) and fund families.

The study notes that TDF assets continue to grow as a percentage of total defined-contribution assets, with BrightScope projecting that target-date assets will reach $2 trillion in 401(k) plans by 2020.

The study says that target date funds continue to make “huge in-roads into the marketplace,” with the primary distribution channel being DC plans because 401(k) participants want a “buy and forget” strategy where they don’t have to worry about rebalancing their portfolio regularly, and because the Department of Labor allows TDFs to be a qualified default investment alternative (QDIA).

However, the study also notes that number of target-date fund families is no longer increasing.

New entrants to the space include BlackRock’s LifePath Index and Lincoln Financial Group’s Presidential Protected Profiles, but Columbia, Oppenheimer and Goldman Sachs all recently announced that they would be closing down their target-date funds this year.

Some firms’ offering fees have dropped significantly as well since last year, the study found. For instance,

Allianz reduced fees from an average of 0.91% to 0.64%

Nationwide reduced fees from an average of 0.64% to 0.42%

PIMCO reduced fees from 0.88% to 0.80%

The study says that the standard to be a truly low-cost, index TDF fund series is now under 20 basis points thanks to Vanguard (0.18%), TIAA-CREF Lifecycle Index (0.18%) and Fidelity Freedom Index (0.19%). BlackRock LifePath Index (0.28%) and iShares (0.31%) are close behind.

Fees as a whole are still high—.72% is the average institutional TDF fee—but that has fallen 3 basis points since last year.

The study also notes that the percentage of equity held in TDFs at the target date appears to have stabilized at about 42% in 2011 after increasing from 40% to 43% from December 2007 to December 2010.

In last year’s report BrightScope and Target Date Analysts noted that number of funds with a so-called To strategy—aimed at getting investors to retirement—was increasing, with 40% of funds utilizing that type of strategy at the end of 2010 compared with 30% at the end of 2007.

The db-X target-date funds switched to a To strategy in 2011, and the new BlackRock LifePath Index funds also use a To strategy, so the percentage was up to 42% by the end of 2011.

S&P Dow Jones Indices launched on Thursday an index series to help defined-contribution plan sponsors screen and monitor target-date funds. The series includes a set of multi-asset class indexes and provides separate comparisons for To glidepaths and Through glidepaths—strategies aimed at getting investors through retirement.

With Columbia, Oppenheimer, and Goldman closing their TDFs—all of which use a Through strategy—that percentage should rise to nearly 45%, or 21 out of 47, by the end of 2012, the study says.

Use of exchange-traded funds (ETFs) in TDFs is growing as well. For instance, iShares (100% ETF), Lincoln’s Presidential Protected Profile (more than 90% ETFs), BlackRock LifePath, BlackRock LifePath Index and State Farm all have at least a 50% allocation to ETFs. Four other fund companies increased their allocations to ETFs in 2011, and 14 fund companies in total invest in ETFs, representing 28% of the fund families in the study.

Nontraditional asset classes such as Treasury inflation-protected securities (TIPS), real estate and commodities are slowly gaining traction in the TDF marketplace, the study found. Those three asset classes now make up about 6% of the underlying holdings of target date funds, compared to about 4.5% at the end of 2009. AllianceBernstein, Allianz and Fidelity are particularly notable for increasing their allocations to these asset classes, to the point where they commonly comprise 15% to 50% of the portfolios of their TDFs.